Federal Reserve officials shouldn’t be in a hurry to unwind monetary stimulus because elevated slack in the U.S. job market is keeping inflation below the Fed’s target, said Boston Fed President Eric Rosengren.
“Significant excess capacity remains in labor markets,” Rosengren said in a speech at an annual conference held by the New Hampshire and Vermont Bankers Associations in Boston. “It seems to me appropriate for monetary policy to continue to be patient in the interest of ensuring that the economy reaches full employment and the 2 percent inflation target as quickly as possible.”
The Federal Open Market Committee repeated in July that the Fed’s benchmark interest rate is likely to stay low for a “considerable time” after the central bank completes its bond- purchase program, which is set to end this year. Fed officials in June forecast that the benchmark rate would rise sometime next year after they’ve held it near zero since December 2008 in a bid to stimulate the economy.
Rosengren called the August employment report released today by the Labor Department in Washington “somewhat disappointing,” saying the figures highlighted “that the time it will take to return to full employment remains highly uncertain.”
Still, he is “pretty confident we are on the right path” to get to full employment, he said in answer to an audience question following his remarks. While “housing hasn’t been as strong as I was hoping,” Rosengren said that “overall, we’re getting a reasonable outcome. The economy is improving. We’re on the right track.”
American employers hired fewer workers than forecast in August and the jobless rate dropped because people left the workforce, the report showed. The 142,000 rise in payrolls was the smallest monthly advance this year and lower than the most pessimistic estimate in a Bloomberg survey of economists after a revised 212,000 gain in July. The median projection in the survey called for a 230,000 increase.
The unemployment rate fell to 6.1 percent last month from 6.2 percent, and the labor force participation rate, a measure of Americans who are employed or looking for work, decreased 0.1 percentage point to 62.8 percent, matching the lowest since 1978.
Speculation that the Fed might move forward its timetable for a rate increase intensified after the release of minutes of the July meeting on Aug. 20. The minutes showed that some participants were “increasingly uncomfortable” with the Fed’s forward guidance. The FOMC is scheduled to meet on Sept. 16-17.
“We should be moving away from providing date-based forward guidance, and instead focus on what incoming data tell us about reaching full employment and 2 percent inflation within a reasonable time period,” said Rosengren, who doesn’t have a vote on the FOMC this year. “As we approach levels of unemployment that many consider ’full employment,’ the Fed should no longer issue guidance on the approximate timing of any monetary policy changes.”
Rosengren said a “sizable fraction” of still-elevated unemployment “should be attributed to cyclical causes” and cautioned that the recent pace of the decline in the jobless rate may not be sustained as discouraged workers re-enter the labor force.
“The number of people moving from out of the labor force into employment is considerably larger than the number moving from being unemployed (but in the labor force) to employed,” Rosengren said.
“In this way, as labor markets tighten, the unemployment rate may decline more slowly than its recent trend, even with growth in payroll employment continuing at the levels seen in the first half of this year.”
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